Real estate is the largest component of our economy. This is why the government puts so much effort into trying to manipulate its direction. We’ve been talking about the problems in banking. Now, we’ll turn our focus to real estate. It is also in a difficult and dangerous position. Both Residential and Commercial Real Estate face a coming crash in order to clean out the system and find fair market prices. We’ll start with residential real estate today and then move on to commercial.
Home values have certainly dropped over the past few years, but they have not been allowed to drop fully to the values at which the rot can be cleaned from the system. Of course, this is a very general statement. The reality is that real estate is a very local market. The market in one city or state is going to be very different from that of another. At the same time, there are certain factors that affect all US real estate markets and so we will be talking generally about the entire market.
You are probably aware that many mortgages were written in the hay day of the mid 1990’s that should have never been written. If you watched The Coming Storm video you saw the chart that showed there have always been two big waves of problem mortgages that would hit the residential real estate market. The first was devastating as many homes were foreclosed on the owners who couldn’t actually afford the mortgage they had taken out. The second wave of problem mortgages is the Alt-A mortgage resets which begin in the second half of 2010 and increases into 2011. As these mortgages reset, there is massive potential for new foreclosures.
However, there is already a huge backlog of foreclosure. The number of homes which have been foreclosed upon hit a record in 2009. So far 2010 is making 2009 look quiet. In March of 2010 367,056 properties were foreclosed on which is 8% higher than the same month in 2009. And the sad part is that banks are avoiding foreclosing on many, many people who are not making their payments because they don’t want to have to reflect the realities of these bad loans on their books (since they are not currently marking to market), so the situation is much worse than reported in these numbers. Nearly 10% of all homeowners missed a mortgage payment in the first quarter of 2010.
For the first time in US history, banks own a greater share of US residential housing net worth than all individual Americans put together. 24% of all homes in the US are underwater (they owe more on their homes than their homes are worth.)
This is clearly a bad situation, but there are a couple more reasons why it is going to get worse. The US Government just ended its massive home buyer tax credit. It was giving away money for people to buy homes. Because of this people who weren’t planning to buy a home for a few months or a couple years, were incentivized to go out and buy a home before April of 2010 ended. This meant that a huge number of people bought homes during this period, but now there are very few buyers left. Whenever government gets involved and tries to manipulate the market, there are always unintended consequences which make the policy disastrous. In this case, there will be very few new buyers of homes in the coming year because everyone who knew they might be buying a home soon had an incentive to do so in early 2010. Since that time has passed, we’ve seen a 40% drop in mortgage applications to the lowest level since April 1997!
In addition to new defaults and foreclosures coming onto the market, and very few new buyers to buy, the chances of interest rates rising is very high. The US government is not going to intentionally raise rates any time soon, but if the world markets decide they will demand higher rates to lend money in this country, our government will have few choices (all of which are bad). Higher rates will make it far less likely that people look to move up from their current home or move from renting to buying.
Next we’ll look at commercial real estate.
This is Part 4 in the series Economic Depression. To use this as a growth tool to better understand your own calling, please read Part 1, Pt 2 and Pt 3.
Photo credit: Jeremy Hall